Bizspace Spotlight

Four former bankers from Silver State Bank were grossly negligent and approved Arizona and Nevada land loans in violation of the bank’s lending policies that ultimately caused the bank’s failure, according to a lawsuit filed by the Federal Deposit Insurance Corp. in February.

Silver State was based in Henderson, Nev., but had four branches in Arizona.

The FDIC is suing for $86 million tied to losses incurred by Silver State as a result of what the agency described as risky land loans made to developers in Arizona and Nevada.

Regulators accuse the bank’s CEO and chairman, Corey Johnson, and ex-Vice President of Real Estate Lending Douglas French, of hiring a loan officer, Timothy Kirby, that had no experience in credit analysis or appraisal review. The lawsuit paints a picture of a Phoenix banker that sought help from his superiors, and became increasingly desperate when he couldn’t get the professional training he needed. Despite that knowledge, he continued to collect lucrative commissions on the land loans he made.

Former Senior Vice President Gary Gardner was an experienced loan officer at Silver State Bank, but continually violated the bank’s policies in his lending practices, the FDIC alleged in its complaint. Loan officers also were rewarded hefty commissions, usually about 10 percent, on the bank’s fee income for all loans they originated. That created a culture that put profit before sound underwriting practices, regulators alleged.

As real estate development in Phoenix and Las Vegas boomed, Silver State bankers began financing parcels of land that were based on the estimated value of the finished project, rather than the raw, undeveloped land. In the boom years, bankers weren’t concerned about basing the loan values on undeveloped land because appraisals were steadily rising. The problem was that many of those projects were never completed or not viable — and the developers began to default in droves as the bottom dropped out of the economy.

In its claim against the Silver State bankers, the FDIC cited 14 loans, including a $20 million loan for a 157-acre residential project in Peoria, that incurred substantial losses for the deposit insurance fund. Most of those loans were acquisition, development and construction loans made between January 2006 and February 2008 ­— sometimes for projects that were not viable. Some of the loans were made to refinance or pay down the principal on previous loans from the now-defunct Mortgages Ltd.

Increased Risk

Bankers from Valley Capital Bank NA in Mesa and First National Bank of Arizona in Scottsdale also have been sued by the FDIC in the past year. They probably won’t be the last. Former directors and officers of failed banks in Phoenix and across the nation now face the greatest risk of being sued by regulators and shareholders since the Savings and Loan Crisis in the 1980s.

As of Feb. 14, the FDIC has authorized lawsuits in connection with 49 failed institutions and against 427 individuals for directors and officers liability, with damage claims of at least $7.8 billion since 2009. Regulators said Silver State’s collapse cost the deposit insurance fund about $550 million.

Zachary Gubler, an associate professor of law at the Sandra Day O’Connor College of Law at Arizona State University, said he expects a spike in the number of lawsuits filed against directors and officers of failed banks.

Using the savings and loan debacle as a reference point, the FDIC said it brought suits or settled claims against about 24 percent of the directors and officers of banks that failed between 1985 and 1992. Gubler said that’s probably a reasonable estimate for today.

Insurance companies the real battleground

Richard Amoroso, an insurance attorney at Polsinelli Shughart LLC in Phoenix, said the FDIC ultimately may be aiming to recoup losses from the deposit insurance fund by going after officers’ and directors’ insurance policies, which tend to have far deeper pockets.

“Historically, there has been some precedent in the insurance industry when regulators go after the officers and directors of failed insurance companies,” he said. “It’s not unusual for the liquidator to go after the D&O policy.”

The directors and officers of companies, including banks, typically have D&O insurance to protect them from lawsuits tied to their performance.

That’s what happened to the former directors and officers of FNB when they reached a settlement with the FDIC in August 2011.

Executives present at the wider FNB settlement and mediation meetings said the lawsuit and the subsequent $20 million settlement was just a procedural step that allowed the FDIC to sue the bankers’ insurance carrier, Catlin Group Ltd., a Lloyd’s insurance syndicate, which has denied liability.

Amoroso said the trend became more common after the WorldCom and Enron scandals, when regulators realized the significant assets available by suing the carriers of D&O insurance.

It’s very likely regulators will look at those policies and try to recoup some of the losses for the shareholders and the deposit insurance fund,” Amoroso said.

Maureen Beyers, an attorney with Osborn Maledon in Phoenix representing Kirby, said Silver State’s D&O policy also will cover Kirby, which is why she believes he was included in the lawsuit, despite the fact that he is not a former director or officer and was not involved in any wrongdoing.

“Chasing low-level bank employees who were acting in good faith and following directions from their superiors is not what the FDIC should be spending our federal tax dollars on,” Beyers said.

“The individual loans being questioned were presented to the bank’s senior loan committee with accurate data, and the bank was well aware of the exposure that accompanied each loan,” she said.

Beyers said Kirby was never an officer or director of Silver State Bank, and did not serve on the board or hold other leadership roles.

Patrick Egan, an attorney with Fox Rothschild LLP in Philadelphia, who is representing French, said the allegations in the complaint are based on a distorted view of what took place in the economic meltdown of 2008.

“The FDIC has overstated and cherry-picked the facts from a series of complex transactions. We are confident that Doug will prevail in the defense of this matter,” he said.

In a separate action, the FDIC’s enforcement section accused French of misconduct tied to several multimillion-dollar land loans and for his role in the failure of Silver State Bank. He agreed to a consent agreement that prohibits him from working for any FDIC-insured banking institution and to pay a civil money penalty of $35,000 to the U.S. Department of Treasury.

Johnson and Gardner’s attorneys could not be immediately reached for comment.